Suncor unveiled a bigger budget for 2016, but the company trimmed its production forecast.Ben Nelms/Bloomberg
The oil patch is getting ready to hibernate.
A darkening commodity outlook for 2016, combined with uncertainties over major pipeline proposals and the looming threat of more stringent environmental rules imposed by governments in Edmonton and Ottawa, is undermining confidence in the sector, setting the stage for deeper cutbacks as companies map out spending plans for next year.
Suncor Energy Inc. late on Tuesday unveiled a bigger budget for 2016, but the company trimmed its production forecast and warned it could chop spending if oil prices continue to sink.
Rival Canadian Natural Resources Ltd. has said it could slash as much as $1.5-billion from its budget next year should conditions deteriorate. And Royal Dutch Shell PLC, which mothballed a major oil sands project last month, has put expansion plans on hold indefinitely while it works to drive down costs at existing operations, the outgoing head of its Canadian division said this week.
"Until the market conditions are right, we will not be putting forward a project," Lorraine Mitchelmore told The Globe and Mail.
The tepid outlook from the industry's largest players shows the sector is hunkering down for what promises to be a dismal winter – typically the busiest time of year – as the 18-month slump in energy markets shows no sign of abating.
It points to yet another downshift in spending, analysts say, as scores of companies struggle to cover already reduced expenses and investor payouts with fast-shrinking cash flows.
"This isn't really a market where we would expect producers to grow and blow through their drilling inventory," said Chris Feltin at Macquarie Group Ltd. in Calgary. At today's oil prices, he said, "many plays don't actually make economic sense, so I think holding production flat with limited capital is probably the best course of action."
Spending outside the high-cost oil sands is poised to tumble by up to 18 per cent next year, he estimates, after falling by as much as 35 per cent so far this year compared with 2014. Among the largest oil sands producers, aggregate spending could drop by 7 per cent next year versus 2015, he said.
Expectations for the industry have shifted rapidly in recent months as quarterly losses piled up and U.S. oil prices resumed their downward slide.
On Wednesday, West Texas intermediate oil sank to less than $40 (U.S.) a barrel for the first time since late August before settling at $40.75. Western Canada Select oil sands crude for January delivery fetched about $15 less than that, according to Calgary broker Net Energy Inc., retracing multiyear lows plumbed in the summer. The association representing Canadian drilling contractors now expects 2016 to be among the worst in a generation, with the number of wells drilled falling by 58 per cent compared with 2014 and job losses surpassing 28,000.
In the oil sands, the price rout has already claimed 17 projects, representing 1.3 million barrels a day of squelched capacity, according to ARC Financial Corp. How much of that gets resurrected is an open question, as major producers balk at committing capital to growth plans.
To be sure, some companies are pressing ahead with expansions. Suncor, the first large oil sands producer to formalize spending plans so far, said it would plow more than half of its 2016 budget of between $6.7-billion (Canadian) and $7.3-billion into growth projects.
Others are increasingly cautious, however. Cenovus Energy Inc., for example, has said it expects to spend between $1.5-billion and $2-billion next year. But restarting expansion work at its flagship Foster Creek and Christina Lake projects will depend on the success of cost-reduction initiatives as well as the impact of pending changes to environmental and fiscal regulations, chief executive officer Brian Ferguson told analysts last month.
"For [companies] that don't have active projects, where the economics sort of make you want to finish them, I think you're just going to hibernate," said Jackie Forrest, vice-president at ARC, a Calgary-based private equity firm.
"It's very hard to live within your cash flow at these prices," she said, "so I think it's going to be another year where they're cutting even more."